# Equity Method

I am looking at an equity method problem and realized most of them have been at book value. Will we have to worry about the balance sheet implications if there is goodwill involved or will the questions be based on an investment at BV? Ex. ABC Co. invests \$10,000 and acquires 20% of XYZ equity. Assume: BV of XYZ is \$48,000 During 2007, XYZ earns \$1,000 and pays dividend of \$100. What are the B/S and I/S impacts for ABC? If this doesn’t work, forgive me…I am just trying to show an example of what I mean.

BS 10000 + 0.2(1000-100) IS 0.2*1000

So it doesn’t matter that ABC paid \$10,000 for a BV of \$9,600?

i dont htink so… anyone concer?

you’re right…it doesn’t matter… just take the cost of payment…and adjust for your net income and dividend share…

In this case, 10000 is considered cost I guess…never seen such an example before.

It does matter…that amount is depreciated (straight line) so the income on IS is % equity- this year’s depreciation On BS the new investment is Original COST + % net income - % dividends - this years depreciation hope that helps… its also an epense under prop consolidation and consolidation

trek7000 Wrote: ------------------------------------------------------- > So it doesn’t matter that ABC paid \$10,000 for a > BV of \$9,600? I think you need to depreciation the premium you paid over BV over a certain period…say 4 years. You net income from the sub would be reduced by 100 each year. Not positive though.

in your example the origincal cost would 1000 but the 400 would be depreciated over however many years

it doesnt matter… but if this was a 100% acquisition… and paid amount was higher than BV (assets are readjusted upwards to reflect current price) than the rest is either depreciated and amorized (amortized due to goodwill, but in the new ruling goodwill is test for impairment)